Churn

What is Churn?

Churn (also called attrition) measures the percentage of customers or revenue lost during a specific period. For subscription businesses, understanding and managing churn is fundamental to sustainable growth and profitability.

There are two primary ways to measure churn:

Customer Churn Rate: The percentage of customers who cancel or don't renew their subscriptions during a given period.

Customer Churn Rate = (Customers lost during period ÷ Total customers at start of period) × 100

Revenue Churn Rate: The percentage of revenue lost due to customer departures or plan downgrades during a given period.

Revenue Churn Rate = (MRR lost during period ÷ Total MRR at start of period) × 100

The latter is particularly important because it weighs customer losses by their revenue impact – losing a $1,000/month enterprise customer has a greater financial impact than losing a $10/month individual subscriber.

Why Churn Matters

Churn directly affects your company's growth trajectory. Even small improvements in retention can dramatically impact long-term revenue:

1. Growth Ceiling: High churn creates a "leaky bucket" that limits how fast you can grow, regardless of new customer acquisition.
2. Customer Acquisition Cost (CAC) Recovery: Higher churn means less time to recoup acquisition costs.
3. Lifetime Value (LTV): Churn is directly related to customer lifetime value – lower churn means higher LTV.
4. Net Revenue Retention (NRR): A key metric for SaaS businesses that investors scrutinize closely.

According to OpenView's 2023 SaaS Benchmarks Report, gross revenue retention has declined 5-13% across company sizes, putting increased pressure on expansion revenue, with top-performing companies seeing only 107% expansion compared to 119% in previous years.

Common Churn Reasons

Based on patterns observed across subscription businesses, common reasons for churn include:

1. Pricing issues: Customers don't see enough value for the cost
2. Competitor adoption: Customers find a better alternative
3. Poor support or service: Customer needs aren't being met
4. Missing functionality: The product lacks features customers need
5. Product bugs or reliability issues: The product doesn't work as expected
6. Business changes: Customer's company closes or pivots
7. Lack of usage: Customers no longer need the product
8. Poor user experience: The product is difficult to use
9. Onboarding challenges: Customers struggle to adopt the product
10. Payment issues: Failed payments lead to involuntary churn

Churn Prevention Strategies

Effective churn reduction requires a proactive approach:

1. Early warning systems: Implement predictive analytics to identify at-risk customers before they leave.
2. Segmented retention strategies: Different customer segments churn for different reasons – develop targeted approaches.
3. Proactive customer success: Don't wait for problems to arise; regularly check in with customers to ensure they're getting value.
4. Dunning management: Reduce involuntary churn with effective handling of failed payments and expired cards.
5. Exit interviews: Learn why customers leave to identify patterns and improvement opportunities.

Many companies find customers who receive proactive retention outreach are retained at twice the rate of those who don't, especially when those efforts are personalized based on specific risk factors.